Exam 8: Consolidated Tax Returns

When the parent acquires 51% of a subsidiary U.S. corporation, the subsidiary can join the consolidated financial statements and the consolidated tax return of the parent.

Match each of the following terms with the appropriate description, in the context of a consolidated Federal income tax return. -Gain deferral on intercompany transactions

Deferring recognition of an intercompany gain is one ____________________ (advantage/disadvantage) of electing to file consolidated returns.

Which of the following entities is eligible to join in a Federal consolidated return?

With the filing of its first consolidated return, the parent corporation of a Federal consolidated group makes an irrevocable election as to how the group will allocate a tax year's income tax liability among the group members.

Which of the following items is not computed on a consolidated basis?

ParentCo purchased 100% of SubCo's stock on January 1, Year 2, and the companies have filed consolidated returns since then. Taxable income computations for the members include the following. Neither group member incurred any capital gain or loss transactions during these years, nor did they make any charitable contributions. ParentCo's SubCo's Taxable Consolidated Year Taxable Income Income Taxable Income Year 1 \ 100,000 \ 70,000 N/A Year 2 \ 100,000 (\ 70,000) \ 30,000 Year 3 \ 12,000 \ 20,000) ? Year 4 \ 100,000 \ 200,000 ? The Year 3 net operating loss:

Lacking elections to the contrary, Federal consolidated NOLs are carried back two years and then forward twenty years.

Match each of the following terms with the appropriate description, in the context of a consolidated Federal income tax return. -A new affiliate uses the LIFO method for inventories

ParentCo, SubOne and SubTwo have filed consolidated returns since Year 2. All of the entities were incorporated in Year 1. Taxable income computations for the members include the following. None of the group members incurred any capital gain or loss transactions during these years, nor did they make any charitable contributions. ParentCo's SubOne's Taxable SubTw o's Taxable Consolidated Year Taxable Income Income Income Taxable Income Year 1 \ 200,000 \ 50,000 \ 150,000 N/A Year 2 \ 200,000 (\ 60,000) \ 70,000 \ 210,000 Year 3 \ 20,000 (\ 60,000) (\ 40,000) ? Year 4 \ 200,000 \ 130,000 \ 10,000 ? How should the Year 3 consolidated net operating loss be apportioned among the group members? ParentCo SubOne SubTwo

The treatment of group items on a Federal consolidated corporate income tax return ____________________ (always, sometimes, never) results in a reduction of consolidated taxable income.

Members of the ABCD Federal consolidated group conduct various transactions with each other during the tax year. These include the purchase/sale of land and depreciable assets, the licensing of intangible assets, and the conduct of service arrangements. How does the tax law account for these intercompany items? In your answer, be sure to use the terms matching rule and acceleration rule at least once each.

ParentCo and SubOne have filed consolidated returns since Year 1. SubTwo was formed in Year 3 through an asset spin-off from ParentCo. SubTwo has joined in the filing of consolidated returns since then. Taxable income computations for the members include the following. None of the group members incurred any capital gain or loss transactions during these years, nor did they make any charitable contributions. ParentCo's SubOne's Taxable SubTw o's Taxable Consolidated Year Taxable Income Income Income Taxable Income Year 2 \ 100,000 \ 50,000 N/A \ 150,000 Year 3 \ 30,000 (\ 30,000) \ 10,000 \ 10,000 Year 4 \ 50,000 (\ 40,000) \ 40,000) ? Year 5 \ 130,000 \ 130,000 \ 10,000 ? If ParentCo does not elect to forgo the carryback of the Year 4 net operating loss, how much of that year's consolidated net operating loss is carried back to offset prior years' income?

Each of the members of a Federal consolidated tax return group can claim its own $40,000 AMT exemption, subject to phase-out.

Consolidated return members determine which affiliates will pay how much of the annual Federal income tax liability by making a(n) ____________________ election.

Outline the major advantages and disadvantages of filing Federal corporate income tax returns on a consolidated basis. Limit your comments to the income tax effects of the election.

In computing consolidated taxable income, the profit/loss from a sale between Subsidiary and Parent is an example of a(n) ____________________ item.

A parent-subsidiary controlled group exists where there is ____________________ percent ownership of all of the affiliates within the group, and there is an identifiable ____________________ corporation.

The Rack, Spill, and Ton Corporations file Federal income tax returns on a consolidated basis. The group's tax return currently is under audit. Under a valid tax-sharing agreement, each corporation is liable for one-third of the group's consolidated tax liability. The affiliates have agreed with the auditor that the group's unpaid liability for the year is $90,000. Because of an incorrect tax return position, another $3,000 in interest and an $18,000 penalty is attributable solely to Ton. ​ At present, only Rack is solvent and has the cash with which to make such a tax payment. What is the maximum amount for which the government could be successful in forcing Rack to satisfy the outstanding liabilities of the consolidated group?

ParentCo owns all of the stock of both SubOne and SubTwo. List three "intercompany transactions" that might occur among the three members of the consolidated filing group.